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SECTOR SENTIMENT RUN

Our monthly sentiment run is a behavioral, market-based gauge of investor sentiment in the Materials Sector. Any relative performance measure is tied to the benchmark S&P 500 Materials Sector INDEX (GICS). Further screening methodologies are included in the link to the deck below.

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CLICK HERE to access the March Sector Sentiment Run presentation.

 

Key Call-Outs:

 

Positive Sentiment

Negative Sentiment

 

  • Looking at short-interest, 7 of the top 12 least shorted names are in the Gold Mining & Chemicals space with large-cap Diversified Metals and Miners being the most heavily shorted (FCX, AA, TCK, AWC, FMG). Gold Miners are the least heavily shorted sub-sector
  • 8 of the top 12 with the lowest buy ratings are in the Metals & Mining space, with 5 of the 8 being Gold Miners
  • Combining consensus “buy” ratings and short-interest, Diversified Chemicals, Specialty Chemicals, and Forest Product names have the most positive relative sentiment when combining both metrics. Diversified Metals and Mining, Aluminum, & Commodity Chemicals have the most negative sentiment.
  • With the outperformance in precious metals YTD, relative outperformance, declines in volatility premiums, and net futures and options positioning all suggest the market views Gold Miners much more favorably vs. the beginning of 2016. Looking at the gold market, contract positioning has gone from a consensus net short futures and options position moving into 2016, to a consensus long position in gold (TTM and 3 year z-scores are tracking +2.4 and +2.4 respectively) with futures open interest up 22.4% month-over-month. With the lack of hedging and existence of leverage in the space, each tick in the gold price is leverage won or lost. In the case of the more leveraged names (Barrick, Newmont), a long position is a highly correlated way to be leveraged long of the gold price. This highly correlated leverage to the price of gold likely explains the lack of short-interest in the space. 
  • The largest sector divergences in growth metrics (TOP-LINE, OPERATING, BOTTOM LINE) exist in the mining space. We expect a downward revision in sell-side estimates in the space as many mining company expectations still need to be taken down while some are already discounted.  

 

 


CHART OF THE DAY: This Late Cycle Indicator Just Hit A 17 Month Low

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... For #behavioral evidence of that reality, look no further than one of our better new short selling ideas – US Housing (ITB). Signed contract activity for “Pending Home Sales” contracted another -2.5% sequentially in January. That’s a 17 month low in rate of change terms…"

 

CHART OF THE DAY: This Late Cycle Indicator Just Hit A 17 Month Low - 03.01.16 Chart


Disciplined Risk Premiums

“In some places we’re picking up disciplined risk premiums.”

-Cliff Asness

 

While it’s easy to rib my friends at Barron’s sometimes (on cover stories about “No recession – we’re going back to 3% GDP”, for example), I try to give credit where it’s due and I applaud their headline story this weekend about one of the asset managers I respect most – AQR.

 

I cited a fantastic interview AQR’s founder, Cliff Asness, did in an excellent markets book I’ve been reviewing for Early Look readers titled Efficiently Inefficient, by Heje Lasse Pederson. The aforementioned quote was part of an important answer Asness gave on AQR’s strategy:

 

“I think in some places we’re picking up disciplined risk premiums that are not very correlated with long-only markets, which means, if someone doesn’t have those in their portfolios, they should add them. In other places I think we’re taking advantage of human biases and we’re trying to be disciplined and determined about it, taking the other side of some common psychological trait or institutional constraint…” (pg 164)

 

Back to the Global Macro Grind

 

Just to boil this down, a “risk premium” is a return that’s greater than whatever you’d call the “risk free” rate. For us, it’s what we get paid for understanding the prevailing growth and inflation environment and having the right “risk” allocations associated with that.

 

What most people miss is how the rate of change of growth and inflation is affecting market expectations. That’s why there is a lot of “excess return” to be made in front-running where asset allocators have to, as Asness points out, “add to their portfolios.”

 

Sure, a big shot endowment man might start with what he “needs” as a return, but if the risk free rate is a negative yield and illiquid assets are deflating, then the risk premium is in owning style factors like liquidity, “low-beta” and, of course, Long-Term Treasury Bonds.

 

Disciplined Risk Premiums - GDP cartoon 02.29.2016

 

In other words, as US growth slowed from 3% to 2% to 1% (from its cycle-peak of 3% in 1H of 2015):

 

  1. Long-term Treasury Bond exposures like TLT have earned a risk premium of +8.4% YTD
  2. Utilities (XLU) have earned a risk premium of +7.0% YTD
  3. If you ran a hedge fund that is only long Utes (XLU) and short Financials (XLF), you’re +18.5% YTD

 

Oh, and that would probably be called a boring hedge fund that isn’t putting “leverage” on that pristine risk premium associated with the basic understanding that rates fall (they don’t “hike”) during #GrowthSlowing (XLU +7% YTD vs XLF -11.5% YTD).

 

To be fair, no reasonable risk manager would put their entire fund in one LIQUID non-consensus position like XLU vs. XLF (see Ackman’s ILLIQUID consensus Valeant (VRX) “pick” for details), but there would be one heck of a story on the cover of Barron’s if someone did!

 

I’m obviously generalizing here. I’m well aware that the +8.4% and +7.0% (and +18.5%) returns do NOT include interest and/or dividend payments. In the hedgie format they don’t SUBTRACT fees. And, of course, I am using a “risk free rate” of 0%.

 

Next.

 

Well, we can be like every other consensus talking head and yap about Trump, China, or Oil today. Or we can just get back to work and A) protect the risk premium we’ve earned YTD (Rule #1 = Don’t Lose Money) and then B) build upon that (compounding returns is cool).

 

Let’s start with the TAIL risk wagging the disciplined dog here – corporate profits:

 

  1. Earnings Season is coming to an end – 485/500 companies in the S&P have reported
  2. Aggregate SALES are -4.5% year-over-year and EPS (non GAAP in some cases) are -8.5% year-over-year
  3. Only 3 of 10 S&P Sectors had POSITIVE year-over-year EPS growth
  4. Ex-Telecom (don’t do that Mucker!) Healthcare and Consumer Discretionary EPS growth closed the quarter on the lows
  5. Financials finished Earnings Season with NEGATIVE EPS growth of -5.9% year-over-year

 

Not to simplify the complex, but if 3-6 months ago the cover of the WSJ walked through that a #LateCycle rate hike would perpetuate a stock market decline via “down earnings” for non-Energy Financials via Yield Spread compression, would people have listened?

 

Moreover, people are starting to remember that there is what Soros calls “reflexivity” (Asness calls it a “common psychological trait”) associated with stock market declines.

 

For #behavioral evidence of that reality, look no further than one of our better new short selling ideas – US Housing (ITB). Signed contract activity for “Pending Home Sales” contracted another -2.5% sequentially in January. That’s a 17 month low in rate of change terms…

 

And, yes, like early cyclicals (Industrials, Energy, etc.) now this #LateCycle consumption and employment factor (Housing Demand is linked to both) has slowed to NEGATIVE -1.4% year-over-year. For Housing Bulls (we were The Bull on Housing for most of last year) #NotGood.

 

Neither is being invested on the same side as the crowd (at the turn) when the economic, profit, and credit cycles are rolling off their cycle-peaks. But you already know that. Welcome to March. Let’s get out there and compound some risk premiums!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.65-1.81%

SPX 1
RUT

NASDAQ 4

VIX 18.54-26.50
USD 96.43-98.63
Oil (WTI) 28.48-34.75

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Disciplined Risk Premiums - 03.01.16 Chart


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

China, Oil and Earnings

Client Talking Points

CHINA

But if we blame China and Oil for everything, all good – after seeing the Shanghai Composite re-test its year-to-date lows, the Chinese had a slew of central-planning headlines to change that. Including “cutting 5-6M jobs from zombie enterprises” (imagine the U.S. did that?) – bullish move there vs. expectations, Shanghai Composite “off the lows” +1.7%.

OIL

Oil is prodding the top-end of its immediate-term $28.48-34.75 risk range (WTI) so we would be looking to re-load on Energy related shorts again (newsflash: at $35-45 Oil and Oil Volatility = 60-70, most credit issues remain). You simply have to be there selling the top-end of the risk range so that you can cover lower.

EARNINGS

Imagine consensus blamed the following reality for terrible U.S. Equity returns in the last 6 months: 485/500 S&P companies have reported an aggregate Sales decline of -4.5% (and an earnings year-over-year decline of -8.5% on non-GAAP numbers); that made-up EPS decline is right inline with the year-to-date decline of the Russell 2000 of -8.7%.

 

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 23% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number
GIS

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.

 

Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower.

 

Three for the Road

TWEET OF THE DAY

*NEW VIDEO*

A #SuperTuesday16 Preview with @PotomacResearch & @HedgeyeDJ

https://app.hedgeye.com/insights/49467-washington-on-wall-street-super-tuesday-preview-with-jt-taylor-and-da… @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

Your decisions reveal your priorities.

Jeff Van Gundy

STAT OF THE DAY

Kate Spade & Co (KATE) short interest into this morning's print is the highest in 3 years.


The Macro Show Replay | March 1, 2016

 


Cartoon of the Day: Blast Off!

Cartoon of the Day: Blast Off! - GDP cartoon 02.29.2016

 

"If the Old Wall wants you to imagine that Friday’s 1% GDP report was a “beat” (when the expectation for the past 2 years has been +3-4% growth), that’s fine," Hedgeye CEO Keith McCullough wrote in this morning's Early Look. "Your 2016 portfolio returns, however, have sided within being long asset allocations that do well when GDP growth slows from 3 to 2 to 1. So start your March off right - short the Financials (XLF) – buy more Utilities (XLU)."


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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